Companies find outsourcing can backfire as quality, customer service suffer

By Rick Barrett of the Journal Sentinel

Published on: 11/10/2010

When the executives at Master Lock Co. evaluated manufacturing they had outsourced to China, they came to a conclusion that would have surprised many people: It was better to make some of those products back home in Milwaukee.

Even with lower labor costs in Asia and Mexico, Master Lock and other companies have found that outsourcing isn't always the best solution and, in some cases, it's laden with problems and disappointments.

"We have been looking at pulling work back for about the past three or four years," said Master Lock spokeswoman Rebecca Smith.

The Milwaukee-based lock manufacturer, which has shifted production from here to places such as Mexico and China, still stands by its decision to outsource some products. But the common business practice is no longer considered a panacea for U.S. manufacturers trying to lower costs.

That's clear from a new business survey from Milwaukee-based American Society for Quality, which polled more than 300 companies to find what they liked and didn't like about outsourcing.

The survey, done in October, found that 55% of the companies were "substantially dissatisfied" with their outsource provider in the areas of innovation and making process improvements. Only 34% said outsourcing provided a good value.

Fewer than half of the companies, 41%, said outsourcing met their performance metrics.

While outsourcing can be a quick fix to lower costs, in the long run it can backfire - sometimes badly.

Communication problems, poor customer service, slow delivery times, and quality control are just some of the pitfalls.

"There are all sorts of stories of failure, where companies bring work back because their customers are complaining," said Jean Harvey, ASQ business process outsourcing expert and an author on the subject.

The Internet is loaded with outsourcing tales of woe, including YouTube recordings of customer service conversations.

Some websites outline in great detail what you can expect when dealing with a company that has outsourced its customer service - and it's enough to scare some people away.

"Major failures make it to the Web very fast," Harvey said. "They get people to listen to them."

Quality control

Even so, some studies have shown that only a dollar's worth of work comes back to the U.S. for every $10 that is sent offshore. Overseas outsourcing isn't going away as long as it makes economic sense.

"The best way to sum it up is we are continuously looking at our supply-chain strategy," Master Lock's Smith said. "We will produce in Milwaukee whenever possible."

The company now has about 350 manufacturing employees in Milwaukee, far fewer than it had years ago.

In 2000, it recalled 752,000 locks, suggesting that its Chinese manufacturing came at a higher-than-expected price. Master Lock customer Smith & Wesson Corp. informed the lock-maker that the two halves of certain gun locks could be pulled apart without a key, giving children or others unintended access to a firearm. After investigating, Master Lock attributed the problem to tool wear at the Chinese facility that made the locks.

The ordeal underscored a dilemma that thousands of American businesses have had to confront: being forced by competitive pressures to manufacture overseas, including outsourcing work to foreign companies, while still maintaining quality.

When quality, the cost of freight, delivery times and other factors are considered, sometimes it's cost-neutral or cheaper to make products yourself, in U.S. factories, rather than outsource them overseas.

"You have to look at the total costs," Smith said, adding that Master Lock has saved and created some jobs in Milwaukee by bringing previously outsourced work back here. It's called "in-sourcing" or "reverse outsourcing."

Keeping customers

The ASQ survey found that low-cost outsource providers may attract customers but can't always keep them.

Companies complain that the providers don't understand their business practices or culture. The more complex the task, the more that can go wrong - sometimes multiplied over millions of transactions.

"There can be a huge gap in understanding," Harvey said. "If you have trained someone to do a complex but specific task, as soon as there is a variation they get confused."

Add to that the pressures of massive volumes of work, tight deadlines, language barriers, communication from thousands of miles away, delivery issues, and the need to keep costs down, and outsourcing can get messy. Providers may promise things they can't deliver, especially when it comes to lower-level employees who are given inadequate training and a workforce that's in continuous churn.

Caution urged

Companies should proceed cautiously when handing off work to outsource providers, according to Harvey.

"Do dry runs for a while. Don't go public (with outsourcing) until you are sure that you won't get negative backlash," he said.

Offshore providers are getting better, fast. As they gain experience, some of the horror stories will fade.

So while the pressure is immense, outsourcing is here to stay, according to Harvey.

"There are some countries, now below the radar, that will come in and push with more competition. The good providers are investing in their people, and the other ones will fall away," he said.

Trying to avoid having your job outsourced?

"The recipe is quite clear," Harvey said: Increase your skills, add a personal touch, and set yourself apart from outsource providers with knowledge of your company that nobody else has.